Wednesday, June 5, 2013

Clarification of non-SM Product Auctions

In a previous Blog post, I outlined our draft plan for ending Supply Management ("SM")for all of Canada.

I proposed a truncated k-double auction.  By the number of inquiries I have received on this, it appears I need to supply some more details on this proposal.

When doing a double auction, there are a few optional methods that need to be specified.  My suggestions are as follows:

  1. Everybody who submits a bid or ask will pay/receive the same price if cleared.  For somebody who was willing to pay a lot more, they end up getting it cheaper than they hoped for.  If someone bid too low, their bid won't be accepted as it was below the strike price that everybody enjoys.  If someone was asking for a low price, they may end up getting a lot more than what they had asked for.  If they asked for too high a price, their asking may be above the strike price, and they won't be selling their commodity during this auction.  This system minimizes the need for guessing what everybody else is bidding.
  2. I suggest there will be multiple auctions for each quota period.  This enables producers and processors to make a recovery play if their bid was way off in the previous round.  There can be a problem with multiple auctions.  If everybody plays nicely, there won't be a problem, they re-set their bids (if they so choose), and they can get their commodity bought or sold in the next round.  However, some may think they have the other side over a barrel. For example, a producer might figure than he can leave his chicken barn empty if he has to, but the processing plant absolutely MUST have a supply of chicken, so the producer significantly jacks up his asking price for a second round of auctions.  It can tend to polarize the remaining bids to the extremes of the pole, rather than bringing buyers and sellers together.

    I therefore suggest that the first auction is only for within your home district.  If you are not located in that District (buyer or seller alike), you cannot put in an offer.  For Chicken Farmers of Ontario, there are 9 Districts, and each producer and processor would submit their bid/ask to the auction for their home district.

    District Map for Chicken Farmers of Ontario
    If they were not totally successful in buying/selling all that they needed, they would have a second chance in the province-wide auction.  With more players, if they wish to play games with their bids, they will most likely be left sitting on the sidelines with no transactions in the next quota period.

    A third auction can be held for those who still want to sell/buy, adding in additional buyers/sellers from within Canada but from a different province (ie. inter-provincial bids).

    A final auction can be held for those who still want to buy/sell that would include inter-provincial as well as foreign bidders.

    For transportation purposes, all winning bids/asks will be matched at their strike price so as to minimize transportation costs, as previously defined.

    If someone failed in all 4 rounds of auctions, they weren't trying hard enough, or they need to find a new career.

    Automated by software on-line, each auction could be done in 15 minutes.  Time would be allowed between auctions for people to reconsider their positions, seek advice, and to type in their chosen bids.

    This system will give preference to domestic production, if the buyers & sellers so choose.  If the local suppliers or producers are bad actors, customers will skip that auction and go to the next.  If the end, the customer gets what they want.
  3. Some commodities are done in batches (eg. broilers, turkeys).  Other SM-commodities have a continuous flow (eg. milk, table eggs), which cannot be easily shut off and re-started.  This could  cause a market imbalance between producers and processors.  A milk plant can more easily clean out the plant, lay everybody off, and wait for better milk prices, or better auction results.  The farmer isn't so lucky.  To make things more balanced, it is suggested that long term "take-or-pay" contracts could be established for each commodity, for example a 3 to 5 year production quantity, well in advance of the start of the start of delivery.  When that is close to expiry, the farmer can decide to retire that cow, or continue milking her and sell her milk on the more lucrative spot market (ie. month by month).
Lots of opportunity.  Lots of choices.That's what I like!

This posting has been used to upgrade the draft plan from Rev. #3

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